There is no doubt the robo-adviser tagline is getting plenty of airtime even if no one likes it very much. Both bits seem to cause offence: “robo” because there is scepticism that machine can replace human and “adviser” because they do not provide advice in the formal sense.
“Discretionary direct” may be the jargon some insist on but perhaps this is just a case of the financial services industry getting tied up in semantics and reacting defensively to something new and disruptive.
Let’s try and get beyond the hype and figure out what all the fuss is about and for whom this is an opportunity.
Robo-advisers are on the march on both sides of the Atlantic. US automated investment service Wealthfront’s assets have reached $2.4bn and while the size of the overall market is only in the tens of billions, growth rate is rapid and there are at least a dozen services already live.
Most offer something very similar to MarketRiders’s original concept launched back in 2008 with modern portfolio theory powered asset allocation, delivered via ETFs with regular rebalancing.
In the UK, there is just as much interest but the focus is predominantly on Money on Toast, which is a simplified advice proposition, and Nutmeg, which follows the US model.
The industry really started to take Nutmeg seriously when Schroders took an investment stake 12 months ago. Aberdeen immediately admitted it had wanted to invest as well suggesting the big brands were not going to let the start-ups run away with the idea. For me, the most interesting thing will be to what extent the investment industry, populated with well-trusted brands, will be usurped by new entrants.
The big brand response has begun in the US led by Vanguard, Charles Schwab and Fidelity. Vanguard Personal Advisor Services is an ultra-low cost online advice proposition for clients with $50,000, which will cost 0.3 per cent all in. Charles Schwab launched its Schwab Intelligent Portfolios in March, which is an automated service for clients with as little as $5,000. It does not charge anything for advice or the platform, just the fund management charges. Fidelity has a partnership with Betterment, which provides a white label version of its platform to financial advisers.
In the UK, we are seeing signs of life in simplified advice from the likes of Parmenion-powered Wealth Horizon and the FCA’s Project Innovate is said to be inundated with this type of discretionary direct propositions.
We are also seeing the big brands breaking the surface here too. Investec Wealth & Investments will launch a discretionary direct service called Click and Invest and Brewin Dolphin is said to be considering its options in this area having removed the distraction of its execution-only Stocktrade that it sold to Alliance Trust last month.
Perhaps most significantly Hargreaves Lansdown declared its hand last week by launching HL Portfolio+. These are six ready-made portfolios with twice-yearly rebalancing that carry no charges over the standard platform fee and fund management costs. However, they add up to as much as 1.9 per cent so this is hardly a low cost option even if it ticks the convenience box.
What Hargreaves Lansdown has been successful building is a range of guided solutions based around the popular Wealth 150 list of recommended funds. Its rapidly expanding range of multi-manager funds (made up predominantly of Wealth 150 funds) is now joined by the HL Portfolio+ range (made up of HL multi-manager funds predominantly made up of – you guessed it – Wealth 150 funds). This is an impressive case study in levering a strong brand to take control of more of the value chain: platform, own brand funds and now a bit of investment management.
Those who write off robo-advisers on the basis of their currently modest share of assets are missing the potential they have to appeal to consumers at the heart of the advice gap. Their growth rate in the US points to this.
However, the US examples will not be replicated exactly in the UK, partly because of a different regulatory environment and partly because the MarketRiders model is not the only way to skin this cat.
The big brands need to respond to the genuine forces driving the hype: online, automated, low cost and convenient. However, the primary challenges for start-ups are customer acquisition and trust, which are much easier to deliver with a strong brand. Here the big names have a distinct advantage notwithstanding that Nutmeg has impressively established a beachhead. If we are heading for an outright battle it will most likely turn into the asymmetric warfare of the nimble guerrilla against the mighty establishment, which will be protracted and there will be casualties.
Jeremy Fawcett is head of direct at Platforum.